Tayyip Erdogan's plan to defend lira deposits has given Turkish savers some respite as well as possibly laying the ground for an early election by the President, but it risks piling up debt and stoking already rife inflation.
was an effective tax-free guarantee, backed by the Treasury, that Turks would be made good on the difference between what they earn on their deposits through interest rates and any adverse exchange rate move, encouraging savers to sell dollars and buy lira.
But Erdogan's government could be left on the hook to cover future losses based on the exchange rate, analysts and bankers said after theThe latest pledge amounts to a turnaround for the 67-year-old, who has staked his new economic programme on slashing rates and rejecting the concept of interest. But Turkey's public finances are strong compared to other emerging market countries, leaving it room to provide support.
While questions such as how and when the Treasury will pay and how to account for the tax relief remain, for depositors the new policy delivered much needed protection from erosion. Under pressure from Erdogan, Turkey's central bank has cut rates by 500 basis points since September, setting off theAnnual inflation breached 21% last month and is expected to soar beyond 30% next year due largely to the currency crash, which stokes import prices. Food and other basic goods are higher still, rattling already stretched households.
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